It’s tax time, which means it is also retirement-annuity season. As an investor in a retirement annuity (RA), you’re able to make ad-hoc additional payments into your funds annually, and with the deadline looming the time to top up is now.
The closing date for topping up your RA is 28 February and you should ideally let your financial advisor know a few working days before that date in order to allow for admin processing. Specialising in financial planning services Northwood will ensure that you have the most favourable RA to suit your needs.
Why you should consider topping up your RA
By making more RA contributions before this tax year-end, you stand to reap the tax benefits − provided you haven’t reached your maximum tax deductible RA amount for the year already. What’s more, the returns you get from RAs aren’t subject to dividend withholding tax or capital gains tax.
The benefits include:
- Increasing the monetary amount (income) you receive when your RA becomes available to you, anywhere from age 55 up. When considering the income amount you will receive, remember that two thirds of your RA must be converted into an annuity when you reach retirement age. Top-up payments guarantee you have more money saved now to use later.
- Money invested into an RA is protected in the event of you becoming insolvent.
- In the event of your death, provided you have not withdrawn a lump sum from your RA it won’t be subject to estate duties.
- Being able to claim RA tax deductions against your pensionable income. You can take 15% of your non-retirement funding income to invest further into retirement annuities and thus qualify for a tax break. You will then only be taxed on your taxable income minus the RA amount invested, which can be a significant reduction in tax paid out every year.
The Bigger Picture: National Retirement Reform
As part of the National Development Plan, government wants to increase domestic savings and ensure that South Africans are more likely to have a good quality of life in old age. The national treasury’s process of retirement reform was started to ensure that employees save enough to live comfortably in their old age, and to ensure that employers implement sufficient retirement savings plans for their employees, so they get good value for money later on. Retirement reform also aims to improve retirement-fund governance.
Last year’s Budget Speech announced an increase in the tax-free lump sum available to RA investors on retirement. Many pensioners take one-third of their accumulated money as a lump sum upon retirement. With the retirement reform plans, the tax-free threshold for these lump sums has increased from R315 000 to R500 000.
From March 2015, all contributions into retirement funds (whether pension, provident funds or retirement annuities) will get the same tax treatment i.e. all can claim a tax deduction on their contributions, thus potentially increasing their take-home salaries. As per the National Treasury, T-Day (which was set for 1 March 2015 but which has been delayed to possibly 1 March 2016 or 2017) is an important one to all investors into retirement funds: From T-Day, most taxpayers will be able to deduct a higher amount of contributions from their income.
So what does this deadline mean for you, the RA investor?
Well, the tax deduction cap for retirement fund contributions will increase to 27.5% of the greater of remuneration or taxable income – of the total contributions to an individual’s RA, pension or provident and RA funds. While the annual deduction cap is R350 000, those who contribute more into their RA can carry over unclaimed tax to future years, or have them returned, untaxed, when it comes time to withdraw the funds in retirement.
If you make the 28 February deadline, you can save money from your final taxes paid, so prioritise submitting your application. Doing so is one of those many minor money decisions that make sense in the long run. Remember, if you miss the deadline, you will be ineligible for the tax breaks available for any top-ups you make, but by making use of Northwood’s tax consultants you can rest assured that all the options will be explored to ensure a stress free retirement plan.